I would like to thank the Committee for inviting the Canadian Bankers Association to discuss Division 3, Part 4 of Bill C-44. As Committee members may remember, I appeared before you as part your review of Bill C-15 in May 2016. That legislation enacted the legislative framework for the bail-in regime in Canada, which we continue to support.
My name is Darren Hannah. I am the Vice-President of Finance, Risk, and Prudential Policy at the Canadian Bankers Association. The CBA represents 62 domestic banks, foreign bank subsidiaries, and foreign bank branches operating in Canada, and their 280,000 employees.
Strong, sound banks help families buy a home and save for retirement, help small businesses grow and thrive, and help drive the economy. Over half of all business lending in Canada is provided by banks. In fact, as of September 2016 total authorized lending surpassed $1 trillion, up an estimated 4 per cent over the previous year and 30 per cent since September 2011.
Canada’s banks are prudent lenders and continually work to make credit available to credit-worthy Canadians and businesses in Canada. This prudent approach is a key reason why banks in Canada avoided the financial difficulties that plagued banks in other countries. Maintaining these sound, fundamental principles of prudent lending is important to Canada’s banking system and is in the best interest of all Canadians.
Canada’s Bank Resolution and Bail-In Framework
The amendments being proposed in Bill C-44 are technical changes to further strengthen Canada’s bank resolution regime. These amendments do the following:
- Formally designates the Canada Deposit Insurance Corporation (CDIC) as the resolution authority for its members;
- Requires Canada’s largest banks to develop and submit resolution plans; and,
- Provides the Superintendent of Financial Institutions with the flexibility to set and administer the requirement for systemically important banks to maintain a minimum capacity to absorb losses in a resolution.
During the financial crisis there was significant turmoil in the global financial system. A number of banks in other countries became insolvent and either failed or received taxpayer-funded bailouts. In Canada, this was not the case. No bank was in danger of failing and no government bailouts were required. Canada’s banks were well-capitalized, well-managed, and well-regulated going into the global financial crisis, and remain so to this day.
As you know, the global financial crisis led to a series of significant regulatory changes to international banking standards. These efforts and regulatory reforms were designed with the objective of reducing risk in the global banking system and helping to prevent another financial crisis. While these standards are set internationally, it is up to domestic regulators to translate these international standards into domestic rules and enforce them.
The financial crisis demonstrated that it is important for banks – particularly large global banks – to have a plan in place to be able to unwind its operations with minimal disruption to the overall financial system. These plans are known as resolution plans. It is important to note that CDIC has been acting informally as the resolution authority for its members and requiring Canada’s largest banks to develop and submit resolution plans for several years now. As such, we do not have any concerns with codifying these authorities through CDIC’s legislation.
A key element of the global financial reform agenda is a bank recapitalization framework, otherwise known as a bail-in regime. The idea was originally proposed by the Financial Stability Board (FSB), which was established in 2009 to monitor and make recommendations about the global financial system. In 2011, the FSB published a report entitled “Key Attributes of Effective Resolution Regimes for Financial Institutions”, which provided a high-level framework for a bank resolution regime to protect taxpayers. This was officially endorsed by the G-20 in November 2011 as part of its broader financial sector reform agenda.
The federal government then began exploring potential options to institute a bail-in regime for domestic systemically important banks in Canada. Bill C-15, passed by Parliament last year, established the legislative framework for the bail-in regime in Canada. Currently, we are working very closely with the government on the development of regulations and guidelines, which would set out further features of the bank resolution regime. We look forward to commenting on these draft regulations and guidelines once released.
In short, a bail-in regime provides a framework to allow the conversion of certain long-term debt obligations into capital, in the unlikely event that a bank depletes its capital and is in danger of failing. It provides a strategy to ensure that losses are borne by shareholders and creditors, and protects taxpayers in the event of a bank failure. The bail-in framework does not capture deposits as part of its resolution framework.
Instead, the bail-in regime is an added level of protection for depositors as it provides a roadmap to recapitalize the bank so that it can remain in operation. Furthermore, eligible Canadian bank deposits are already insured up to $100,000 by the CDIC in the unlikely event that a bank fails, so bank customers can rest assured that their deposits are safe.
The bail-in framework ensures that Canada remains consistent with international standards endorsed by the G-20, and provides the government with another option in its bank resolution toolkit despite the strength and stability of Canadian banks. We are supportive of the framework, and we look forward to continue working with the government as it finalizes its regulations to complete the bank resolution regime.
Thank you again for the opportunity to present our views and I look forward to your questions.